Citigroup's Sandy Weill.

Sandy Weill

How Citigroup's CEO rewrote the rules so he could live richly.

In 1933, two events occurred that would transform the world of finance. The first was known to be important at the time: In the wake of the 1929 stock-market crash, Congress passed the Glass-Steagall Act, which erected what became known as the "Chinese wall" between commercial banking and investment banking. The other event went unnoticed: In Brooklyn, Sandy Weill's mother gave birth to the future Citigroup CEO. Neither the congressmen celebrating their new legislation nor Weill's undoubtedly happy Polish-immigrant parents had any reason to suspect a connection between the two, but their fates would be intertwined. A sort of financial cage match between Glass-Steagall and Weill had commenced: Two go in; only one comes out.

In the end, Weill would win—he outlasted Glass-Steagall, and tore down the wall between commercial and investment banking, but his victory could prove to be his undoing. Thanks in large part to Weill's influence, Glass-Steagall was repealed in 1999. The change allowed commercial and investment banks to merge and sanctioned the creation of one-stop financial supermarkets such as Weill's Citigroup, which is a brokerage, a bank, and an insurance company all in one. Weill has reaped a massive financial reward as a result, but he's also gotten into a great deal of trouble.

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Over the past week, Weill has been in the headlines for an alleged quid pro quo he worked out with Jack Grubman, involving the admission of Grubman's daughters to an elite Manhattan nursery school (yes, such things exist). The part of the story that's most damning to Weill: He has admitted to telling Grubman, a star telecom analyst at Citigroup's Salomon Smith Barney subsidiary, to "take a fresh look" at AT&T's stock rating. What Weill had to gain from leaning on Grubman is unclear—he may have wanted to encourage AT&T to let Salomon underwrite its upcoming wireless IPO. Or, as Grubman later wrote in an e-mail he now disavows, Weill may have needed AT&T CEO C. Michael Armstrong's vote to oust the Citigroup co-chairman, John Reed—allowing Weill to take sole control of the company.

But more sedate headlines are probably more important, if less delicious. Citigroup faces federal, state, and industry investigations for a host of allegations that stem from the conflicts of interest that have emerged in the very post-Glass-Steagall world Weill helped create:hyping the stocks of lackluster companies in order to rake in those companies' IPO business; using loans as loss leaders to encourage companies to give Citigroup their investment-banking business; helping Enron and WorldCom conceal their massive debts; "spinning" rocketing IPO shares to executives in exchange for business from the executives' companies. Allegations such as these are particularly dangerous, because they encourage small investors to lose faith in the stock market in two ways: by demonstrating that powerful inside players have an unfair advantage in the market, and by leading them to believe (rightly, of late) that the information investors receive from stock analysts and company audits cannot be trusted.

Weill is unaccustomed to the role of business villain. For most of his career, he has been a Wall Street hero—his life story conforms nicely to the template that the business world prefers for its icons: a self-made dealmaker who, by dint of a world-transforming vision, rose from humble origins to become a Wall Street titan. In Weill's case, his vision was to build a financial-services company that could cross-sell a broad variety of financial products—stocks, credit cards, checking accounts, insurance, loans, whatever its heart desired—to its customers. When Weill merged Travelers with Citibank to form Citigroup in 1998, he stood on the brink of finally seeing his dream come to fruition.

There was, however, one obstacle: Weill's birthmate, Glass-Steagall. Technically, the Citigroup merger was illegal in 1998, because the Depression-era law remained in effect, although it had been weakened by a succession of regulatory decisions. But Weill appealed to President Clinton and Alan Greenspan, and Citigroup received a temporary dispensation from the federal government to allow the merger. Theoretically, that gave Weill time to make his new conglomerate conform to the law. But Weill tried a different tack—he wanted the law to conform to it instead. Travelers and Citi lobbied Congress strenuously to pass new legislation that would bless their marriage, and Congress complied. In the end, Citigroup basically drafted the new law, Gramm-Leach-Bliley, that would govern its behavior. As banking analyst Kenneth H. Thomas notes, "Citigroup is not the result of that act but the cause of it." Gramm-Leach-Bliley became one of Weill's crowning achievements.

The problem with Gramm-Leach-Bliley wasn't so much that it replaced Glass-Steagall, only that it did so shoddily and haphazardly. There was a consensus that banking reform was needed—American banks were being kept too small to compete with their German and Japanese counterparts. But because Citigroup needed the legislation passed quickly in order to remain in business, Congress was forced to consider and pass a new bill on deadline, without time to carefully think through its consequences. The most important element that was missing from the Financial Services Modernization Act, as Gramm-Leach-Bliley was dubbed, was the modernization of the regulatory agencies that oversee the marketplace. Banks were given the right to merge into behemoths, but regulators remained scattered and focused on a world that had ceased to exist.

Or at least, that's the liberal case for new regulations. Weill appears to have realized that it's a powerful case, and he's moved to pre-empt it by self-imposing new rules and regulations that Citibank will abide by. But that puts him in a strange situation: Weill helped write the rules (or unwrote them) that permitted Citigroup to come into existence, then behaved sleazily under those rules, and now he's implying that those rules are to blame for his (and his firm's) behavior.

Perhaps for once, a bipartisan consensus can be reached. With financial scandals, Democrats usually say that the problem is inherent in the way the rules were written, and that new ones are needed. Republicans usually say that the problem stems from the actions of one or more bad actors. In this case, thanks to Sandy Weill, they can both be right.

Chris Suellentrop is a video game critic and a contributor to the New York Times.

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